Euro-Area Exports Leap Despite Currency Gain

Exports of goods from the eurozone jumped in August, suggesting the euro’s appreciation against other major currencies has yet to crimp economic growth.

Adjusted for seasonal patterns, eurozone exports rose by 2.5% in August from July, while imports were up by just 0.4%, the European Union’s statistics agency said Monday.

As a result, exports of goods exceeded imports by 21.6 billion euros ($25.5 billion), up from the EUR17.9 billion surplus recorded in July.

The eurozone economy has enjoyed a surprisingly strong 2017, with growth accelerating in the three months to June and becoming more broad based. That has fueled expectations that the European Central Bank will start to wind down its purchases of government bonds from January. Since that would slow the supply of new euros, the currency has strengthened against the U.S. dollar and the British pound over recent months.

That appreciation threatens eurozone businesses that sell their products overseas, since it makes them more expensive to foreign buyers. Indeed, seasonally adjusted exports fell in both June and July, while the trade surplus narrowed in the later month.

In recent months, ECB policy makers have repeatedly highlighted the stronger euro as a possible impediment to boosting inflation.

“Even if the recent appreciation is not particularly large, we have to be very careful and monitor these developments,” Bank of Italy Gov. Ignazio Visco told The Wall Street Journal recently.

The August trade figures are the last policy makers will see before their Oct. 26 meeting, at which they are expected to decide to scale down their asset purchases. The jump in exports should offer them some reassurance that the euro’s gains haven’t yet slowed the recovery, as should a survey of 3,000 manufacturing companies that showed export orders remained strong in September.

While a stronger currency should weaken exports, economists believe the strength of that effect has weakened in recent decades as manufacturers have distributed their production processes across a large number of countries. That means that a stronger currency can lower the price of the goods that are imported to make an export, thus weakening its impact on the cost of the finished product to a foreign buyer.

Rising exports were partly responsible for an unexpected acceleration in economic growth during the first six months of this year. Having forecast growth of just 1.7% at the start of 2017, economists at the ECB now expect output to increase by 2.2% over the course of the year. That would be the bloc’s best showing since 2007.

Figures out last week showed a jump in industrial output in August, so it seems increasingly likely the eurozone sustained its stronger growth rate in the third quarter.
Source: Dow Jones

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